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Ford's Big Plan to Fix Europe

Ford will take a page from its U.S. turnaround to fix its money-losing European operation.

Ford (NYSE:F) executives have now laid out the company's complete plan for transforming its money-losing European operation, and it's a big deal.

In a call for media and analysts on Thursday morning, CEO Alan Mulally, CFO Bob Shanks, and Ford Europe chief Stephen Odell spelled out the details of their plan to fix Europe: In a nutshell, three factories will close, a slew of new products will arrive, and Ford will give its marketing and brand image in the region a big overhaul.

It's a good, serious plan that has a high chance of success – exactly what we've come to expect from Ford under Mulally. But as Ford made clear, the near-term outlook for Europe is still pretty grim. All of these improvements are going to take time to implement. Profits for Ford Europe are still a long way off – we're talking years, not months.

It's tough medicine to swallow, and Ford's plan may yet face resistance from union leaders. But there was some surprise good news for Ford shareholders in Thursday's announcement as well.

Ford's still healthy, but Europe is getting an overhaulFirst, the surprising good news: Despite the ongoing horrors in Europe, Ford actually raised its overall guidance a bit. While the Blue Oval won't report official numbers until next Tuesday, Mulally and Shanks said that Ford's total third-quarter pre-tax profit will be better than the just over $1 billion it reported in the second quarter, and they continue to expect "strong" full-year results and positive operating cash flow.

That should go some way toward reassuring investors nervous about the grim predictions for Europe. And they are grim: Shanks said that Ford's loss in Europe will exceed $1.5 billion for the full year, and 2013's results will be "similar." Sales have fallen further in recent months, and even with the restructuring, Ford doesn't expect a profit in Europe until "mid-decade."

So what is Ford doing about it? The plan put together by Mulally's team has three parts:

Restructuring. Ford announced on Wednesday that its big assembly plant in Belgium would close at the end of 2014, eliminating about 4,300 jobs. It's also going to close two factories in the U.K. that employ about 1,400 workers total. Ford says that these closures will reduce its European manufacturing capacity by 18% (not counting Russia, where it's expanding). It expects total annual savings of between $450 million and $500 million. These cuts come on top of an earlier announcement that Ford would cut about 500 salaried jobs from its European organization.

Product "acceleration." Last month, Ford announced that it would be bringing a slew of new products to Europe – 15 new-to-Europe vehicles in the next five years. Most are vehicles that have already been developed for other markets, like the Mustang and the Edge SUV. Ford's hope is that it will be able to increase its sales and market share by competing in segments it hadn't previously contested in Europe (larger SUVs, for instance, and an expanded range of trucks and vans), but that may be growth areas in coming years. Ford also plans to roll out high-tech features it offers elsewhere, like EcoBoost engines and SYNC infotainment systems, to increase its appeal to European customers.

Brand strengthening. This one is a little more nebulous, but the gist seems to be that Ford wants its European image to be more like its freshly overhauled U.S. image: high-tech, high quality, safety-minded, and green, with stronger commercial fleet offerings and more exciting, image-enhancing products. Ford also plans to improve customers' experiences of its dealers, and to encourage lower inventories at dealerships, which should help improve transaction prices.

The upshot: Falling back on "One Ford"The European auto industry as a whole has needed a reduction in production capacity for some time. To some extent, today's announcements mean that Ford has taken the lead, though whether others will follow remains to be seen.

Some, like PSA Peugeot Citroen (NASDAQOTH:PUGOY), are under pressure from their home governments (France, in PSA's case) to preserve jobs at whatever cost. General Motors (NYSE:GM) seemed to be trying to restructure its long-troubled Opel subsidiary for a while, but may now be moving toward a solution that simply takes the company off of GM's global balance sheet. Market leader Volkswagen (NASDAQOTH: VLKAY.PK), meanwhile seems set on using strong results from other regions to offset European losses for a while, in hopes of gaining market share in the long run.

Ford, characteristically, has fallen back on the "One Ford" approach that has transformed its U.S. business into a shining success. By matching production capacity to "real demand," as Mulally often says, Ford will attempt to transform its European business into a sustainably profitable one, at whatever level of sales the market generates. That's what worked in the U.S., and it looks to have a good chance of working in Europe.